What is happening in Japan?
In 45 days, Japan's 30Y Government Bond Yield rose a MASSIVE +100 basis points, to a record 3.20%.
Over $500 BILLION worth of "safe" 40Y Japanese Government Bonds have lost 20%+ in 6 weeks.
Is Japan's bond market imploding? https://x.com/KobeissiLetter/status/1926707640282878456
What's happening in Japan is not "normal." Japan's 40Y government bond that was yielding ~1.3% two years ago is now yielding 3.5%.
As yields continue to surge, inflation has begun to rebound and Japan's economy is decline.
It appears Japan is entering a recession. https://x.com/KobeissiLetter/status/1926707643025928294
The surge all began when the Bank of Japan (BOJ) made a major policy shift. After years after BUYING bonds, the BOJ stopped doing so. This resulted in much more bond supply hitting the market, which drove yields higher. And, the BOJ has a colossal balance sheet still. https://x.com/KobeissiLetter/status/1926707645450166622
In fact, the Bank of Japan now owns a whopping 52% of all domestic government bonds. By comparison, life insurers, banks, and pension funds hold 13.4%, 9.8%, and 8.9%, respectively. The BOJ still holds a massive $4.1 trillion of government bonds on its balance sheet. https://x.com/KobeissiLetter/status/1926707647958446305
Furthermore, the Japanese government now holds $7.8 trillion of debt. This makes the Japanese government the third most indebted government in the world, behind the US and China. As we are seeing in the US, rapidly rising government debt has left bond investors worried.
Japan's Debt-to-GDP ratio recently exceeded 260% for the first time in history. Their Debt-to-GDP ratio is roughly DOUBLE the United States. It is also one of the top 5 in the world.
Last week, Japan's Prime Minister warned their financial situation is "worse than Greece." https://x.com/KobeissiLetter/status/1926707652630876242
As we saw in the US last week, Japan's bond auctions are now spurring WEAKER demand. When there is less demand, bond prices fall and yields rise. As the Japanese economy slows and uncertainty rises, yields are accelerating. This will be highly damaging to Japan's economy. https://x.com/KobeissiLetter/status/1926707655277445198
We are already starting to see the effects of both tariffs and rising yields. In Q1 2025, Japan's Real GDP CONTRACTED by -0.7%, much more than expectations of -0.3%. This marked the first decline in Japan's GDP since Q1 2024. We expect to see more weakness ahead. https://x.com/KobeissiLetter/status/1926707657672425867
Meanwhile, Japan's CPI inflation is hit 3.6% in April, rising +0.4% month-over-month. CPI ex fresh food jumped 0.7% MoM, the largest monthly increase since October 2023. On an annual rate, it accelerated from 3.2% to 3.5%, the fastest since January 2023. Stagflation is here. https://x.com/KobeissiLetter/status/1926707660079980701
We have seen similar trends in the US, with the 10Y Note Yield surging above 4.60% last week. Bond auction demand has weakened, rate cuts are being delayed, and deficit spending is rising. Under the new tax bill, the US deficit is set to grow by +$3.8 TRILLION in 10 years. https://x.com/KobeissiLetter/status/1926707662474854490
The US is now seeing Debt-to-GDP levels that are ~10% ABOVE WW2 levels. Such a rapid surge in Debt-to-GDP led to the Moody's downgrade of the US credit rating on May 17th. However, this is still only HALF of what Japan is seeing. Japan needs a major restructuring. https://x.com/KobeissiLetter/status/1926707665020780619
Finally, to make things even worse, real wages are declining SHARPLY in Japan. Real wages fell -2.1% year-over-year last month, marking the largest drop in 2+ years. So, as inflation rebounds, real wages are declining. The BOJ can NOT hike rates into this environment. https://x.com/KobeissiLetter/status/1926707667646517640
The main problem with Japan's economy is the variety of conflicting drivers. While inflation rises, real wages are falling, and while the government takes on more debt, demand is falling. If yields continue to surge, the BOJ will need to intervene, but it won't be pretty.
The Yen Carry Trade collapse in August 2024 was a glimpse of how intertwined Japan is with global markets. On August 5th, the Japanese stock market experienced its worst loss since 1987. Keep watching Japan. https://x.com/KobeissiLetter/status/1926707674508398842
...despite all this, Nikkei is up +4.4% the past month and down just -3.18% the past year.
...equity markets traditionally have been able to readily impute forward economic outlook, but we are witnessing a stark disconnect because of casinofication of markets.
